Draft Determination on Equivalence of Reward

Perceived disparities between remuneration for tied agents and independent advisers have been a bone of contention for ages. The Registrar also expressed concerns about the possibility of using remuneration, other than commission, to create “…opportunities for inappropriate regulatory arbitrage in favour of tied advice and distribution models.”

Proposal RR: Equivalence of reward to be reviewed, published in the 2014 Retail Distribution Review, proposed certain measures to be implemented, subject to further consultation.

The FSB did however highlight that, despite this deferral, it remained concerned that a number of current practices in relation to tied adviser remuneration give rise to inappropriate distortions in the advice market, posing risk of unintended levels of migration from independent to tied models. Accordingly, the FSB advised that, as an interim measure pending full implementation of Proposal RR, it intended to clarify certain practices it regarded as inconsistent with the principle of equivalence of reward, using mechanisms provided for in Part 3 of the Regulations to the Long-term Insurance Act, 1998.

This draft determination is the outcome of the above process.

Key provisions of the determination

Against the background outlined above, the determination sets out which forms of remuneration or consideration the Registrar regards as not being substantially in accordance with the provisions of Part 3A of the Regulations to the Long-term Insurance Act, and accordingly as not being compliant with the principle of Equivalence of Reward.

The determination identifies two specific forms of remuneration or consideration that would enable an insurer to provide its representatives with potentially significant financial advantages that it is not able to provide to independent intermediaries.

Accordingly, such arrangements are clearly not substantially aligned with the provisions of Part 3A and not in compliance with the principle of Equivalence of Reward, These arrangements are:

The provision to a representative of various forms of credit or access to credit on terms that are more favourable than those available on an arms’ length basis; and

Arrangements whereby an insurer in effect “buys the representative’s book of business” from that representative when the representative’s intermediary agreement with the insurer comes to an end. The policyholders making up such a “book” are already customers of the insurer concerned by virtue of its agency relationship with the representative, and the insurer is already obliged to ensure appropriate ongoing service to such policyholders, regardless of whether or not the intermediary agreement with the representative remains in place. Accordingly, the rationale for the insurer remunerating the representative for retaining access to its own customers is unclear.

In addition to addressing the above specific remuneration arrangements, the determination includes a more general limitation providing, in effect, that remuneration arrangements where more than 15% of a representative’s overall remuneration comprises benefits that are not generally provided to all of the insurer’s representatives (or all representatives of a particular type), do not comply with the principle of equivalence of reward.

This provision is intended to address other remuneration arrangements (over and above those specifically identified above) through which insurers could provide benefits to selected representatives that it would not be permitted to offer to independent intermediaries. The provision also seeks to ensure a reasonable degree of equivalence with the requirement in Part 3A that an independent intermediary may only be remunerated through “commission in monetary form”, while recognising that Part 3A contemplates that a representative may be remunerated “in cash or in kind”.

The provision seeks to clarify that, in order for remuneration “in kind” to be consistent with the principle of equivalence of reward, it should largely comprise benefits typically available to the insurer’s representatives generally in the normal course of their employment / tied agency relationship with the insurer, rather than including a significant proportion of non-standard benefits that are available only to selected representatives.

The determination contains additional provisions confirming that non-compliance with the principle of equivalence of reward extends, in summary, to arrangements that:

are substantially similar in effect to those identified in the determination; or

entail an undertaking to provide the identified forms of remuneration or consideration in the future.

Lastly, the determination sets out the effective date of its application, including the extent to which it applies to arrangements entered into before the effective date.

Dates and deadlines

The deadline for industry input is 11 December 2017, and the proposed effective date is 1 January 2018.

One senses that there will a few changes to proposed leave dates in December.

About Paul Kruger

He is both editor and writer-in-chief of the Moonstone Monitor, the Moonstone Investment Indicators and the Moonstone Online website. After 35 years in financial services, he is as passionate about the industry as he is about sport, wine and music.